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19 Cards in this Set

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  • Back
production opportunities
the returns available within an economy for investment in productive (cash generating) assets.
time preferences for consumption
the preferences of consumers for current consumption as opposed to saving for future consumption.
risk
in the financial market context, the chance that a financial asset will not earn the return promised.
inflation
the tendency of prices to increase over time.
nominal (quoted) risk-free rate, Krf
the rate of interest on a security that is free of all risk; krf is proxied by the T-bill rate or the T-bond rate and includes an inflation premium.
Real risk-free rate of interest, K*
the rate of interest that would exist on default-free U.S. Treasury securities if no inflation were expected.
Inflation Premium
the premium for expected inflation that investors add to the real risk-free rate of return.
Default risk premium (DRP)
the difference between the interest rate on a U.S. Treasury bond and a corporate bond of equal maturity and marketability.
Liquidity Premium (LP)
a premium added to the rate on a security if the security cannot be converted to cash on short notice at a price that is close to the original cost.
Interest Rate Risk
the risk of capital losses to which investors are exposed because of changing interest rates.
Maturity Risk Premium (MRP)
A premium that reflects interest rate risk; bonds with longer maturities have greater interest rate risk.
Reinvestment Rate Risk
the risk that decline in interest rates will lead to lower income when bonds mature and funds are reinvested.
Term Structure Interest Rates
the relationship between yeilds and the maturities of securities
yeild curve
a graph showing the relationship between yeilds and maturities of securities
"normal" yield curve
an upward-sloping yeild curve
Inverted (abnormal) yield curve
a downward sloping yield curve
Liquidity Preference Theory
the theory that all else being equal, lenders prefer to make short-term loans rather then long term loans; hence, they will lend short -term funds at lower rates than they lend long term funds.
Expectation Theory
the theory that the shape of the yield curve depends on investor's expectations about future inflation rates.
Market Segmentation Theory
The theory that every borrower and lender has preffered maturity and that the slope of the yield curve depends on the supply of and the demand for funds in the long term market relative to the short-term market.